Three Financial Shifts Biotech Leaders Need to Know for 2023

Financial challenges have marked the funding landscape for biotech companies for more than a year, but there is reason for optimism. Explore upcoming shifts in the financial landscape that biotech leaders need to know as they step into 2023.

The past year was difficult financially, particularly in the biotech industry. Funding dried up after a period of rapid investing that pushed capital allocators further up the risk curve. A number of investments during this time may also have been motivated by the fear of missing out.

These anecdotal struggles were highlighted in industry research conducted by PPD, the clinical research business of Thermo Fisher Scientific. In a survey of more than 150 global drug development leaders, more than a quarter (28%) cited lack of R&D funding as the top challenge facing their organization. Nearly 80% of those responses came from leaders in biotech.

As we look ahead into 2023, there is still uncertainty in the funding landscape, but forecasts are improving. Private funding is strong, strategic partnerships are forming, and there are signs of healthy mergers and acquisitions (M&A) in the marketplace.

The bottom line is that companies with strong assets are finding financial partners. In 2023, the question will be: Have you proven your drug is safe, effective and able to be commercialized?

Three Financial Shifts Expected in the Biotech Industry in 2023

1. The expected rebound of capital markets will drive a return-to-funding optimism.

While volume and value from a deal perspective are down significantly, there is reason to remain optimistic that 2023 will see a rebound as the capital markets reopen, money comes off the sidelines, investors continue to be creative and M&As increase.

New research commissioned by PPD evaluating the biotech investment landscape found that 50% of respondents expect the public market to return in the next year, if not sooner.

While financial markets are on the rise, many of today’s top drugs are facing loss of exclusivity in the next five years, prompting an urgent need to replenish drug development pipelines. With the imminent need for new therapies to offset the expected losses to generic formulas and biosimilars, the environment will be ripe for new partnerships to emerge.

Nearly two-thirds (64%) of our survey respondents reported that they have considered clinical co-development funding. Of the biotech organizations who reported they have not considered this funding type, over half (52%) said they would be open to considering it as a potential funding option.

Through all the moving parts and pieces, one fact remains: There is significant capital, both public and private, ready to be deployed.

2. Rising interest rates will prompt a return to discipline in investments.

In the past 12 months, the Federal Reserve has increased rates seven times to combat rising inflation, and more hikes are expected to follow in 2023. With current borrowing costs at the highest level since 2007, the funding landscape will see a return to discipline in investments, a byproduct of the interest rate environment.

The appetite for risk still exists, but investors will likely make more cautious decisions when they deploy capital and will structure deals with more due diligence. As markets become more risk-averse and initial public offering (IPO) markets reopen, there will be increased spotlight on credibility, resulting in only the most compelling, data-backed ideas receiving funding.

As a result, nearly half (46%) of our biotech survey respondents said they anticipate funding to be more difficult to obtain in the next year to 18 months, while only a quarter (25%) expect it to be easier. While financers are taking a more disciplined, creative and collaborative approach to deploying capital, many biotechs are evaluating whether they have the best asset in development on the pathway with least risk.

In 2023 — more than ever — we can expect an emphasis on achieving milestones on time and within budget to justify and earn funding.

3. Reliance on credible CROs becomes paramount as operational pressures and demand to demonstrate fiscal responsibility build.

As investors return to a more cautious deployment of capital, the importance of credibility is at an all-time high. It is no longer enough to rely solely on a promising idea and a charismatic team — in this financial landscape, both investors and biotech companies must prioritize reliability and return on investment (ROI).

Rather than growing their own teams, we will see an increase in biotechs outsourcing talent gaps to mature clinical research organizations (CROs). A CRO’s ability to remove fixed costs allows all the invested value to go toward the work, creating greater ROI for the investor and enabling biotechs to demonstrate greater fiscal responsibility.

Roughly one-third (35%) of our industry survey respondents indicated that their company has become more likely to outsource all of a trial over the past two years, and nearly half (47%) said the same for outsourcing part of a trial.

With predictability and cost-cutting moving to the forefront of each deal, a CRO’s ability to reduce the number of relationships, transactions and suppliers involved in a trial will become integral to study success.

Partner with a CRO that delivers efficiency, speed and budget assurance.

Though the financial landscape hasn’t fully recovered yet, there is reason for optimism. Amid remaining market uncertainties, promising science continues to emerge, driving the sector forward despite lingering financial challenges.

PPD® Biotech solutions have been on the leading edge of bringing value to biotech companies and venture capital partners for more than 35 years. Not only does our team specialize in having the agility to work with rapidly growing biotechs and small pharma, our experts also offer end-to-end support backed by a reputation for unmatched quality and reliability. In addition, we emphasize financial transparency and simplicity, giving you, your board and your investors confidence in your spend. From rolling budget forecasts to clear financial breakdowns, we provide simple, centralized billing solutions so you can focus on what really matters: delivering life-changing therapies.